How Bad Is Venezuela's Economic Chaos?

Venezuela’s economy is slowly collapsing, crushed by the pressure of a falling oil prices and the accumulated weight of decades of mismanagement. Venezuela’s currency, the bolivar, is overvalued and artificially propped up by an arcane system of currency controls. The bolivar, like Venezuela’s economy, is trapped in a downward spiral. Within Venezuela the effects of the economic chaos are seen at the supermarket, where empty shelves are a constant reminder of the economic dysfunction that has come to define South America’s fifth largest economy. The economic distress is also felt on the balance sheets of dozens of major U.S. companies who hold sizable assets in Venezuela.

A group of around 40 companies, including General Motors and Merck & Co Inc, together hold assets worth US$11 billion in Venezuela. The problems for these companies stem from the fact that the official dollar exchange rate of 6.3 is fanciful. The unofficial black market rate is close to 190, meaning any time Venezuela devalues its currency, assets currently accounted for at the 6.3 bolivar exchange rate see their value plunge. It’s a phenomenon that has already impacted the balance sheets of major companies.

In late 2014 Scotiabank announced a C$129 million writedown on its stake in Banco del Caribe in Venezuela. Ford started 2015 by writing off its entire $800 million investment in Venezuela. PepsiCo followed suit by writing off a $105 million charge after adjusting the value of assets related to its Venezuelan operations. Spanish telecoms giant Telefonica has written off a whopping $3.23 billion charge and Clorox has taken the decision to simply shutter its operations in Venezuela.

“We saw no hope that we could create a sustaining business in that country,” Clorox’s CEO Don Knauss explained.

Venezuela’s president, Nicolas Maduro, faces no easy policy solutions. Although he has acknowledged that in 2014 his country faced “economic contraction of 2.8 percent and a very high inflation, above 64 percent" his policy responses have focused on blaming store owners and companies for exacerbating the shortages.

Venezuelans have taken to the streets to show their discontent.

Fabio Valentini, a 21-year-old anti-Maduro protester, explained “Venezuela, today, is in a far worse situation than last year. The economy is in crisis. Crime is worse. Our aim is not to topple the regime, but to demand...changes to failed policies.”

On February 12 Maduro took the step of announcing a new exchange rate system, that allows bolivars to be exchanged for dollars at a rate that is closer to the unofficial, black market rate.

The Venezuelan government launched an overhaul of the exchange rate system and introduced a new exchange rate mechanism. The Marginal Currency System, or Simadi, is the third mechanism in the new three-tier exchange rate regime and allows for legal trading of the bolivar. The move represented an easing of the tightly-controlled exchange rates and a departure from the former three-tier system, which strictly rationed access to foreign currency. Under Simadi, businesses and individuals are allowed to purchase and sell foreign currency at the price set by the market.

The new second tier, Sicad, is a combination of the former second and third tiers, Sicad I and Sicad II, with a rate of approximately 12.0 VEF per USD used for non-essential goods. The first tier, the official exchange rate, is unchanged and sells dollars at 6.30 VEF per USD for preferential goods.

The move may make it easier for Venezuelans to buy some basic consumer goods, but it won’t help stabilize the country’s economy in the short term and is also likely to augment existing inflationary pressure.

Maduro has yet to fully account for how his government will meet its $10.3 billion debt obligations in 2015. A March 16 payment totally $1.1 billion is fast approaching and Venezuela's economy is languishing.

Ali Dibadji, an analyst at Sanford C. Bernstein & Co Inc, said “more companies may consider exiting Venezuela if the inability to remove cash or take prices to offset devaluations persist."

I am a Latin America focused political analyst and writer. I split my time between New York City and Mexico City. I just finished writing a book about Mexico. I have written feature articles and op-eds on business, organized crime, and politics for The Atlantic, Foreign Affa...